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Sweden Politics September 2018

Sweden: Elections lead to fractured political panorama, but economic growth should stay robust

September 20, 2018

In general elections held on 9 September, both the center-left and center-right blocs lost support and lack an absolute majority, while parties on the extremes of the political spectrum gained ground. The formation of a stable majority government with the capacity to pass significant reforms currently appears difficult, although the economic fallout in the near term is likely to be limited due to healthy economic fundamentals.

Both the center-left bloc (Social Democrats, Greens and the Left Party) and the center-right bloc (Moderates, the Centre Party, Christian Democrats and Liberals) saw their vote share shrink to around 40%. The center-left bloc has slightly more parliamentary seats than the center-right, although neither has enough seats to govern alone. Both the left-wing Left Party and the right-wing Sweden Democrats, meanwhile, saw their share of the vote rise substantially.

Both incumbent Prime Minister Stefan Lofven and the leader of the center-right Moderate Party have announced their intention to form a government but, with neither alliance holding an absolute majority, the composition of the next administration is uncertain. Some form of collaboration between parties of either bloc, or between the Sweden Democrats and the center-right grouping, will be necessary; however, as of yet there have been few signs of a willingness to compromise. The upshot is a likely lengthy negotiating process and a fragile government which could have difficulty passing meaningful legislation.

Despite the political stalemate, the economic impact in the near term should be limited. The Swedish economy is currently performing well, and benefits from an enviable fiscal position and strong competitiveness which should support above-EU-average growth rates in the coming years. Moreover, the country has a long history of cross-party cooperation on key issues, and there are important similarities between the economic policy stances of the Social Democrats and the Moderates—the largest parties in each bloc—notwithstanding discrepancies over tax and spending priorities. This means that some reform progress is possible.

Analysts at ING are pessimistic about the prospects for a future government but are more sanguine about the economic panorama:

“Whatever compromise the mainstream parties work out, the new government is likely to struggle with either a weak parliamentary position or internal divisions. It is hard to see a constellation that will last long once it starts governing. […] The political stalemate has limited near-term implications for the Swedish economy. With a stable institutional framework, Sweden can probably operate on auto-pilot for some time. There is no obvious need to change the budget for next year, nor does the government face genuinely urgent economic decisions.”

Economists at Goldman Sachs take a similar view:

“The incoming government, whether a continuation of the current government or a shift to the Alliance [the center-right bloc], is likely to be fragile. This implies little scope for passing reforms. But Sweden's fiscal situation remains very robust. This should limit the scope for negative market development. The near-term effect on the economy and monetary policy should also be limited.”

Following the election of a new Speaker, parliament convenes on 25 September. If Stefan Lofven refuses to resign, a vote of confidence must be held within two weeks and, if most MPs voted against his government, the Speaker could then propose up to four alternative candidates for prime minister. In the unprecedented event that parliament failed to back any of these candidates, new elections would need to be held within three months.

On the fiscal front, the 2019 budget must be submitted by 15 November, although current spending allocations could be extended if no new government has been formed by then.

Author:Oliver Reynolds, Economist

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Total industrial production excluding energy notched growth of 1.4% in July over the prior month in seasonally- and calendar-adjusted terms, contrasting June’s revised contraction of 1.0% (previously reported: -1.1% month-on-month).

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